R.J. Reynolds Tobacco Co. received last week another setback in a legal dispute over responsibility for about $84 million in annual Master Settlement Agreement-type payments covering four traditional cigarette brands.

A three-judge District Court appeals court in Florida ruled Wednesday that Reynolds is obligated to make annual payments on Kool, Maverick, Salem and Winston rather than ITG Brands LLC of Greensboro.

Tobacco manufacturers, including Reynolds and Philip Morris USA, agreed in 1998 to settle lawsuits that 46 state attorneys general, including North Carolina, brought over smoking-related health-care costs.

They agreed to pay those states at least a combined $246 billion over 20 years. MSA payments to some states are in perpetuity.

The MSA fees fluctuate annually because they are based on each participating manufacturer’s traditional cigarette sales volume.

According to the Kaiser Family Foundation, participating manufacturers have paid $160.07 billion since 1998, including $3.05 billion to North Carolina.

Florida, Minnesota, Mississippi and Texas chose to negotiate separate settlements with the manufacturers.

The four brands were sold by Reynolds in June 2015 for $7.1 billion to U.K.-based Imperial Brands Plc, which transferred them to U.S. subsidiary ITG. The four brands combined represent about 7.5% of the U.S. market share for traditional cigarettes.

Reynolds divested Kool, Salem and Winston, while Lorillard Inc. divested Maverick, in order for Reynolds to gain federal regulatory approval of its $29.25 billion purchase of Lorillard.

Imperial has made the fee payments in the 46 MSA states since acquiring the brands.

However, federal judges have ruled that Reynolds retains the MSA payment responsibilities in Florida, Minnesota and Texas despite divesting the brands.

Imperial reached an MSA fee payment agreement with Mississippi.

Not responsible?

Both manufacturers have chosen not to make the disputed MSA payments to the three states since June 2015.

Reynolds declined to comment Friday on the Florida appellate court ruling.

In January 2019, the company said its position remains that Imperial purchased the brands and ITG should be making the payments.

ITG said in a statement Friday that it is “gratified the appellate court affirmed the trial court opinion and confirmed that ITG Brands has no liability under the plain language of the contracts at issue.”

The estimated fiscal 2020 payment for the four brands is $40 million to Texas, $32 million to Florida and $10 million to Minnesota. Florida said when it filed its lawsuit that its overall disputed amount was $92.6 million.

However, industry analyst Michael Lavery with Piper Sandler said Friday that Reynolds’ combined MSA financial obligations to three states could be worth $409 million: $207 million to Texas, $135 million to Florida and $47 million to Minnesota.

“Ongoing costs could weight on future (British American Tobacco) earnings,” Lavery said. “We expect further appeals to continue into 2021.”

MSA responsibilities

The Reynolds-Imperial deal included language that called on ITG to use its “reasonable best efforts” to reach an MSA settlement with Florida.

Imperial has countered it did not agree to assume the payments, and that it was relieved of payment responsibility since it couldn’t reach an agreement with then-Florida attorney general Pam Bondi before the closing of the simultaneous purchases.

According to the Florida appellate court ruling, the judges said the Reynolds-Lorillard asset purchase agreement “did not in any way vitiate the responsibilities and obligations of Reynolds under the Florida settlement agreement to the state of Florida.”

“We find the Florida settlement agreement to be a clear and unambiguous contract, which required any amendment to the contract to be in writing and agreed to by all the parties to the contract.

“We find, simply put, that a contract is a contract, and that Reynolds continues to be liable under the contract it signed with the state of Florida.”

“The trial court also correctly found that ITG did not assume liability for payments to Florida under the APA, and that ITG was not a successor or assign under the FSA,” according to the appellate court ruling.

Bondi estimated the annual payment for the four brands is about $30 million.

Bondi said her action “made clear (the state) does not claim that by closing on the asset-purchase agreement Imperial automatically assumed liability for the payments. The sale of major, pre-existing tobacco brands to another company for billions of dollars does not cause the payment obligations to vanish like a puff of smoke.”

Minnesota and Texas

Ken Paxton, Texas’ attorney general, asked in January 2019 that a federal court require either Reynolds or ITG Brands LLC to make more than $125 million in payments.

Paxton argued in his complaint that “nothing in the Texas settlement gives settling defendants, such as Reynolds, the power to unilaterally extinguish their liability.”

“Texas urges that under well-settled Texas law, a contracting party cannot unilaterally eliminate its obligations under a contract via an assignment to a third party.”

“Finally, Texas urges that the central purposes of the Texas settlement — finality and medical reimbursement — would be undercut if a settling defendant could eliminate its obligations under the settlement, while still profiting from the sales of those same cigarettes via a sale of the brands themselves.”

The Texas District Court judge, Rodney Gilstrap, ruled in February 2020 that “Reynolds accepted a perpetual release in return for agreeing to make perpetual payments.”

“Nothing that has intervened since then has lessened that obligation,” Gilstrap wrote. “Reynolds remains as liable today as it was when it entered into the Texas settlement in 1998.”

In Minnesota, attorney general Keith Ellison filed his lawsuit against Reynolds and ITG in March 2018. In September 2019, a Minnesota District Court assigned responsibility to Reynolds and will determine how much the company owes the state.

According to a news release from the Minnesota attorney general’s office, “the court held that Reynolds cannot shirk its obligations to make settlement payments by transferring brands to another manufacturer, and that the plain language of the tobacco settlement requires it to continue to make settlement payments on the sales of brands it assigns to another entity.”

“The court also denied ITG Brands’ motion for summary judgment that it had no obligation to make settlement payments, and directed the state’s case to continue against ITG Brands.”

Delaware legal case

Meanwhile, in a separate legal dispute, Reynolds received a partial victory in September in a state court in Delaware.

That case involved Reynolds trying to prove that Imperial did not employ “reasonable best efforts” in Florida, Minnesota and Texas.

That court ruled in Reynolds’ favor that ITG is not entitled under their 2015 asset purchase agreement to demand protection from state “equity fee” statutes.

Those statues also impose fees on tobacco companies based on their cigarette sales to pay for health care costs in that state.

The court ruled the asset purchase agreement affects only Reynolds’ legal agreement with Florida.

However, the court in Delaware did not rule on whether ITG must indemnify Reynolds the disputed $92.6 million in Florida.

rcraver@wsjournal.com

336-727-7376

@rcraverWSJ

Load comments